Monthly Archives: March 2012

The Crowdfunding Market Nearly Quadrupled in a Year.

$123 Million Year-over-year, Report Says

Earlier last week I posted with enthusiasm that the Senate passed a version of the House bill HR2930, but that we still had some work to do to get it passed. Since then, I have seen some pretty remarkable numbers related to the growth of Crowdfunding, and it isn’t even “legal” yet.

A report was published recently by the Daily Crowdsource that was based on an evaluation of eight reward-based crowdfunding platforms (where a donor receives a reward of value in exchange for a cash contribution) and six investment-based platforms (where investors receive equity or interest on their investment). All platforms evaluated in the latter category were based outside of the US, where they are in fact legal today. The rewards-based platforms evaluated are all US companies and are legal, as long as they don’t offer investors an equity or interest based position in the outcome, and include the popular fundraisers Kickstarter, RocketHub, and WeFund.

In 2011, crowdfunded businesses and projects raised $102 million on rewards-based platforms, including $85.4 million raised by projects that reached their total funding goal. Over 2010 figures, “this signifies a 266 percent increase in the total amount donated and a 263 percent increase in the amount donated to projects that received their full funding,” according to the authors.

They attribute the explosion to the “increase in the number of projects that are being posted online.” More than 31,000 projects sought crowdfunded donations in 2011, up from just under 12,000 in 2010.  The Daily Crowdsource reports that not only are more projects being launched, but the number of projects achieving their full funding goal is also increasing, “indicating the market is becoming more efficient at allocating resources.” The Daily Crowdsource says its research on the nascent crowdfunding industry was conducted over three years, and is based on data collection and interviews with leadership at all 14 crowdfunding platforms evaluated.

Investment-based crowdfunded projects raised a collective $20.5 million in 2011 – five times more than was raised the previous year. And, these aren’t projects that would have ever seen the light of day in front of traditional venture investors. These are projects like Duality of Bell, a short film about Bell, a teenage girl struggling to preserve her youthful innocence with some new-found whatevers, or Build a Greener Block (BABG), a community of Las Vegans looking to take over an empty block in downtown Las Vegas on April 28th and 29th, and for this one weekend they’re transforming the block into a living community, where instead of empty stores there will be a restaurant offering healthy food, a boutique, a café, a flower shop.  Well, you get the idea.

Can you imagine what this space will look like once Congress get’s this bill approved? How about Pandora, which was turned down 300 times by some super-smart Venture Capitalists? Or, Skype. Turned down 40 times before getting funded and going on to a massive exit.

Or, better yet, a little company in Mountain View, that in the early months of 1999, its founders Sergey and Larry, still students at Stanford University at the time, wanted to sell the project they named Google and focus on education. They approached George Bell, the CEO of Excite for a $1 Million buyout. This was rejected by George. There were a number of negotiations that almost led to a $750,000 buyout offer. This was rejected by Sergey and Larry and, according to George Bell (circa 1999) they asked for an investment instead. George said that he rejected the counter offers and let the idea drop. About five months and 22 venture presentations later, Kleiner Perkins Caufield & Byers and Sequoia Capital invested $25 million in Google, and the rest is as they say, history.

I don’t know about you all, but I can hardly wait to get my hands on the next Google, or Facebook, and I am convinced that our buddies in Congress are going to pave the way to make that happen. Of course (shameless plug) iPeopleFINANCE will be the platform on which the next Facebook will promote its first raise, and get funded. A whole new, on-line Silicon Valley for start-ups, funding innovation and creating real jobs. Truly exciting!  


Amazing Poll Results. And, Obamacare.

 

The amazing thing about the Health Care Plan, or as I guess now everybody calls it, Obamacare (even President Obama), is that when you poll Americans on whether they approve of Obamacare, an overwhelming majority (72%) say they are against it, but when you ask the very same people whether they like the pre-existing condition part or the children remaining on their parent’s plan part, they overwhelmingly support it (78%)!

Our Supreme Court is concerned largely with the individual mandate component of the law.  Overall, when asked if “the federal government should or should not be able to require all Americans to obtain health insurance or else pay a fine,” just 28 percent of those surveyed said they supported the mandate, while 66 percent opposed it. Republicans polled 15-1 against, while Democrats polled 46-43% against as well. When polled separately, and asked whether they would support Obamacare without the mandate, 68% said they would. Yet, these same respondents said that if leaving the mandate in was the only way that the law would remain in place, 73% said they would support that. The SAME respondents.

How can this be? Are Americans stupid? Well, maybe. Define stupid. The better answer is that if you throw serious amounts of money at the media, behind a well-engineered campaign, you will produce whatever result you desire. The Republicans and their Super-PACs have done a great job of maligning Obamacare to the extent that I believe 8 year-old boys and girls wake up screaming in the middle of the night, convinced that Obamacare is hiding in their closet, just waiting for the right moment to fly out and pounce on them. Probably with some cadaver it just grabbed from an Obamacare death panel.

So, the conclusion is that while we all hate Obamacare (like good little Germans), we all want our kids to remain on our health care plans until they get out of grad school, and we don’t want  those evil insurance companies to be able to turn Aunt Ethel away just because she discovered a lump, or charge her more money to treat other pre-existing conditions. We can’t stand the individual mandate (we don’t believe it’s constitutional, but the only amendments we can name are the first and second, depending upon what part of the country we live in), yet when faced with a world without Obamacare, we’ll go with the individual mandate. After all, we reason, we HAVE to have Social Security cards, and IDs and Auto Insurance (if we choose to drive, and really, who chooses to walk?). We HAVE to go through TSA screening at the airport if we want to fly. There are after all, Justice Scalia, many things our government requires of us, even today, though you’re right, not cell phones … yet.

A Silver Lining For Progressives? 

So, I guess the big spend against Obamacare got its objective done, but even if the Supremos knock it down on constitutionality, some political analysts believe it would make it easier for Obama to cast Republicans in Washington — including conservatives in the Supreme Court — as obstructionists who have worked against the interests of middle- and low-income Americans. So, maybe the big spend to tell the big lie might backfire on the boys in red.

Democratic political consultant James Carville said that if the court were to strike down the law, “the Republican Party will own the healthcare system for the foreseeable future.””Go see (conservative Supreme Court Justice Antonin) Scalia when you want healthcare,” he told CNN.

A ruling against “Obamacare”, as opponents have dubbed the law, could also take much of the steam out of an issue that has been a rallying cry for Republicans seeking to take over the White House and Senate, and keep control of the House of Representatives, in the November 6 elections. Republicans’ portrayals of the 2010 healthcare law as a step toward socialism and a dangerous intrusion by the government into Americans’ daily lives have helped inspire conservatives, including those in the small-government Tea Party movement.

Without “Obamacare” to rally them into action, it is unclear whether some conservatives would remain as passionate about the 2012 elections, analysts say.

“If this whole thing gets overturned, they could certainly lose some momentum,” said Republican strategist Ford O’Connell, adding that Republicans would need to come up with an alternative, free-market healthcare plan to avoid losing the interest of some Tea Party conservatives. “If it gets overturned, (Republicans) are in for a knock-down, drag-out fight” in the November elections, “because … it is going to fire up progressives,” O’Connell said.

More Interesting Poll Results.

In a measure of how difficult it is to generate support for big change in almost any direction on health care, the Medicare restructuring at the center of the House GOP’s long-term budget plan fared as badly in the survey as Obama’s individual mandate. Asked what Medicare should look like in the future, just 26 percent said it “should be changed to a system where the government provides seniors with a fixed sum of money they could use either to purchase private health insurance or to pay the cost of remaining in the current Medicare program.” Fully 64 percent said “Medicare should continue as it is today, with the government … paying doctors and hospitals directly for the services they provide to seniors.”

Even a solid 56 percent to 30 percent majority of Republicans preferred the current system. How’s that grab you?


Truths. And, Not Truths.

Winston Churchill once said, “A lie gets halfway around the world before the truth has a chance to put its pants on.”

That was before the Internet and Television and 24-hour news cycles,  and way before corporations had perfected the art of public relations, and the ability to invest hundreds of millions of dollars in PR campaigns to advance their commercial and political interests.

This has left us with a number of indelible truths … except they’re not truths. They’re media truths. Things that if I said to you, you would instantly know they were right. Things like “Global warming is false; most scientists disagree that global warming is a fact.” Or, “The Keystone XL pipeline will create 10,000 jobs and tons of oil.” Or, Social Security is about to go broke.” These are  the result of well-planned, well-funded, long-term propaganda campaigns designed to make people believe things that are against their own best interests.

There are lots of other lies as well, most notably dealing with “Job Creation”, “National Security” and the “Price of Oil”. I addressed the Keystone myth in an earlier post and will address Social Security myth in a later post, but right now I would like to focus on the “Global Warming Myth” as my buddy, Rush Limbaugh would call it.

The “Climate Denial” industry is on my mind recently, mostly because I spent much of the Spring (or late Winter) in Boston and New York, and right before I left, I watched the video below. I was in Boston on February 14 and 15, New York on March 8 and 9 and in Boston again on March 20 and 21. The average weather in Boston during February is 29 degrees with 11 inches of snow while the average in New York is 34 degrees with 4 inches of snow. When I was there it was 75 degrees, it hadn’t snowed in like, forever and it was sunny. The evenings were balmy like a Summer night. I also noticed that the United States just completed breaking over 3,600 weather records this Spring.

Want to watch 131 years of global temperatures in 26 seconds? Go here:

http://www.climatecentral.org/blogs/131-years-of-global-warming-in-26-seconds/

But, see … it really isn’t in anyone’s interests to admit that there might be a problem with the climate, because then those responsible might actually have to change some of the ways they do things. And that would be EXPENSIVE. Very.  The “Climate Denial” industry, which is funded by some of the richest corporations on the planet, to protect their profits from regulations that would address climate change, might have to stop spending on the “Climate Denial” Industry and start spending on alternative ways to do things. EXPENSIVE. Far more than the hundreds of millions spent on the perpetuation of the “Climate Denial” Industry. And, as things are going, they seem to be winning.

In spite of the fact that it’s one of the biggest threats we have ever faced, an increasing number of Americans believe there is widespread disagreement in the scientific community about climate change. They believe that most scientists disagree with the notion of global warming.

The truth is that there is actually widespread scientific agreement on climate change, with only a few dissenters, most of them paid in some way by the oil industry. Hundreds of millions of dollars have been spent to create the appearance of disagreement, including deployment of so-called experts, and even TV meteorologists, to repeat talking points favored by big oil and others, but mostly big oil, and Rush Limbaugh.

The good news is that in just the past year, the Internet and social media have brought together social movements across the globe, and there are signs that, in this new Social Media Age, people are beginning to break through the fog of corporate disinformation. But some of the “facts” have been repeated for so many years that most people still think they are true. Maybe truth has one pant’s leg on after all.



A Gag Order on Pennsylvania’s Doctors. Correction and Apologies to Senator Leach.

I was contacted this morning by Casey Smith, the Press Director for Pennsylvania State Senator Daylin Leach, D-17, objecting to a blog I posted on March 26th titled, “

A Gag Order on Pennsylvania’s Doctors.

In that post, I pointed out that among other problems with the Marcellus Shale fracking project in Pennsylvania, was a new law that would forbid Doctors from sharing information with patients about the chemicals contained in the well water surrounding their property, in which they came into contact on a daily basis. I specifically said, in context:
Under a new law, doctors in Pennsylvania can access information about chemicals used in natural gas extraction—but they won’t be able to share it with their patients. A provision buried in a law passed last month is drawing scrutiny from the public health and environmental community, who argue that it will “gag” doctors who want to raise concerns related to oil and gas extraction with the people they treat and the general public.
Pennsylvania is at the forefront in the debate over “fracking,” the process by which a high-pressure mixture of chemicals, sand, and water are blasted into rock to tap into the gas. Recent discoveries of great reserves in the Marcellus Shale region of the state prompted a rush to development, as have advancements in fracking technologies. But with those changes have come a number of concerns from citizens about potential environmental and health impacts from natural gas drilling.
The provision was not in the initial versions of the law debated in the state Senate or House in February; it was added in during conference between the two chambers, said State Senator Daylin Leach (D), which meant that many lawmakers did not even notice that this “broad, very troubling provision” had been added. “The importance of keeping it as proprietary secret seems minimal when compared to letting the public know what chemicals they and their children are being exposed to,” Leach said recently, which sounds like it was scripted for him by the oil development companies upon whose dole he subsists.

The limits on what doctors can say about those chemicals makes it impossible to either assuage or affirm the public’s concerns about health impacts. “People are claiming that animals are dying and people are getting sick in clusters around [drilling wells], but we can’t really study it because we can’t see what’s actually in the product,” said Leach.
So, my initial read of his comment led me to the comment I made about him being on the dole for the oil development companies. Upon re-reading his comment, my interpretation of his comment was wrong and I apologize. I have re-written and re-posted that section, and I apologize to Senator Leach and Casey Smith, and applaud her for her diligence in looking out for just and honest reporting and Senator Leach for looking out for the unempowered citizens of Pennsylvania.

It’s Not Just the Economy, Stupid.

Over the past few years it’s become fashionable in sophisticated political circles to argue that presidential campaigns themselves barely matter. What matters is the economic fundamentals. When the economy is strong, the incumbent party wins. When the economy is lousy, the incumbent party loses. All the rest is just a bunch of sound and fury, signifying nothing.

I’ve long had some problems with this attitude. I don’t think there’s any question that the state of the economy matters, and I agree that political journalists probably ought to pay more attention to this than they usually do. At the same time, it’s easy to go overboard. For one thing, political scientists have come up with a lot of different models, and they don’t all rely on the same economic measures. Nor do they make the same predictions. Nor do they even claim (in most cases, anyway) to explain more than about 60-70% of the variance in how well the parties do. So even if the models are accurate, there’s plenty of scope for other factors to influence presidential elections too.

But are they accurate? It’s easy to be impressed by a model that accounts for past election results with high accuracy. That’s a nice looking regression line, buddy.  But it’s quite another thing for your model to predict elections in advance, and that’s the acid test for any election model. Until now I’ve never seen anyone do a systematic review of actual predictions by the various models, but today Nate Silver filled that void, taking a look at model predictions since 1992.

The results aren’t pretty:

In total, 18 of the 58 models — more than 30 percent — missed by a margin outside their 95 percent confidence interval, something that is supposed to happen only one time in 20 (or about three times out of 58).

Across all 58 models, the standard error was 8 points of vote margin or 4.6 points of incumbent vote share. That was much larger than the error that the models claimed they would have — about twice as large, in fact.

The “fundamentals” models, in fact, have had almost no predictive power at all. Over this 16-year period, there has been no relationship between the vote they forecast for the incumbent candidate and how well he actually did.

Nate argues that the state of the economy does have some predictive power. He figures it at about 40%, but says that most current models don’t even do that well because they’re poorly designed. That doesn’t surprise me: this is a really hard subject with lots of hard-to-answer questions. What matters most, the absolute state of the economy or whether it’s on an upswing/downswing?

Should we look at GDP growth or unemployment? Or something else, like disposable income? Do voters respond to some variables, like inflation, only when they get above a certain level? Etc. This is hard stuff, and we don’t have a whole lot of data points to work with.

What’s more, common sense suggests that other things matter too. For example, I just can’t accept as coincidence that since 1950, incumbent parties have nearly always won after one term in office and nearly always lost after two terms. If I used that as my only rule, I’d have an accuracy rate of 87%. (Though only 80% if you count Al Gore as the popular-vote winner in 2000.)

All of this is one reason why I’m reasonably optimistic about Obama‘s chances in November. Yes, the economy is still in weak shape. But it’s improving (I think, or at least I continue to tell myself while I hold my breath), which I suspect is at least as important as its absolute level. What’s more, his party has been in power for only one term and he’s a strong candidate running against a weak Republican field. Put all that stuff together, and I think his odds look pretty good.

As long as Greece can keep the lie up for about eight more months and Merkel can keep persuading the good Germans to continue to be good Germans, and North Korea stays sedated, and Iran keeps rattling and not thrusting, and no other big bubble bursts (like the student loan bubble for instance), and oil doesn’t go to $150., and no other Soldier loses it in Afghanistan and blows away 20 or 30 innocents, and mexico isn’t taken over by drug gangs, and the rest of Europe can keep their pants on, and Iraq doesn’t erupt in civil war (which will clearly be Obama’s fault) and the Supreme Court doesn’t find the “Obamacare” mandate to be unconstitutional, or even if it does, and the Chinese, well you get the picture. Say again, why would anyone want this job?

Bottom line: the economy matters, but it’s probably wise not to get too deterministic about these things. Monocausal explanations are often appealing, but just as often wrong. The world is a very complicated place.


Crowdfunding. A Little More Work To Do.

As excited as I was about the passage of the JOBS act in the Senate, I am now worried about the constraints the SEC has managed to shove into the Crowdfunding component of the bill. So, there’s some more work to do. 

 After passing HR2930 in the House, this 6-pack of small business modernization reforms cleared the Senate. While most things were left intact from the House bill, the crowdfunding component was tweaked to allow for “more investor protections”. In my opinion, crowdfunding was the most economically important part of the bill, so it’s no surprise that the special interests have dipped their fingers in the mix. Unfortunately, America will pay a price for this in terms of brain-drain. Sound familiar?
Look at the growth:
In over four years of operation, leading crowdfunding site Indiegogo reports virtually no fraud. U.K. crowdfunding leader Crowdcube (which does allow equity finance) reports no fraud.  As is the case for U.S. based peer-to-peer lending site Prosper or AngelList, the popular site for angel investors searching for deal flow from entrepreneurs.  As IBM salesmen thoroughly taught us, never let the facts get in the way of a good FUD story.  If you commit fraud online, your life is over.

Fraud feeds on opacity and on small groups, because those factors increase the probably of not being “found out”.  Ironically, that would well describe the environment of the traditional investment paradigm.  But in the social networking sphere, the more viral any story gets, the more the chances that fraud will be exposed by the people who would know.  Take for example, the recent viral story of the guy who claimed to achieve flight with a bird-like flapping contraption.  It was actually a hoax, 8 months in the making, from a Dutch artist.  Time for the world to find out it was a hoax and have the artist “fess up” — measured in hours.

As reports SBE Council CEO Karen Kerrigan about the recent Senate vote, “We would have preferred that crowdfunding provision to be less onerous and complex for small businesses, and feel the Securities and Exchange Commission has been given too much rein from a regulatory perspective.”  Apparently the SEC, who recently warned that the JOBS Act may harm investors, has not had the time to learn about the years of crowdfunding and social networking experience that we have already.  Perhaps, they are too busy trying to find out where the still-missing $1.6 billion went, that is owed to 35,000 MF Global customers.

But the worst part of the onerous changes is something that few seem to have contemplated.  Every extra bit of regulatory complexity is not only costly to American small businesses.  It will also create an unfortunate “brain drain”.  It’s very simple.  If we make it hard for Americans to invest in crowdfunding, then entrepreneurs will tend to get funded with larger percentages of foreign money.  Even worse, limitations on the amounts or percentages that Americans can invest in national crowdfunding, will force Americans to crowdfund invest overseas. Well, duh!

Many countries are watching the crowdfunding legislation intently and will “fast follow” with their own regulatory changes, the first being to allow US investors to participate in Foreign National deals.  Thus, we absolutely need to keep regulation clean, lightweight and harmonizable.  It may seem counter-intuitive at first, but every extra regulatory hurdle will produce further economic and entrepreneurial brain drain.  Why on Earth, would we want to limit the amount that Americans can invest in their own country?  Let’s please not make this the “Suck America Dry Act”.  Please contact your Representative and request that they “keep the SEC out of crowdfunding”.  Send them this blog post if you like.


Crowdfunding Bill Passes Senate!

Senate passes small business investment bill.

I have posted 6 blogs about this topic since January. Thank you all for your letters to your Senators and Congressmen. I am sure your voices helped make this happen. This post is a little wonky, so if you don’t care about the grisly history of getting controversial legislation passed, just read the first few paragraphs.

President Barack Obama supports the measure, which stands to be one of the few bipartisan bills to pass Congress during this politically contentious election year.

Legislation to help startup companies raise capital by reducing some federal regulations won easy passage in the Senate last Thursday despite warnings from some Democrats that less government oversight would mean more abuse and scams.

Sen. Pat Toomey, R-Pa., a leading sponsor of the legislation, said it “might be the most pro-growth measure that this body will consider, perhaps this whole year.”

Democrats did manage to pass one amendment to increase investor protections, so the legislation will still require another House vote. The House passed the measure two weeks ago on a 390-23 vote. The Senate vote was 73-26, with all the “no” votes coming from Democrats.

House Majority Leader Eric Cantor, R-Va., said he would schedule a House vote next week “so we can get this bipartisan jobs bill to the president’s desk for his signature without delay.” That would be THIS week!

The legislation combines six smaller bills that change Securities and Exchange Commission rules so small businesses can attract investors and go public with less red tape and cost. It eases rules on advertising and permits startups to use the Internet and other social media to solicit a large number of small-scale investors.

The measure sailed through the House with almost no opposition but met resistance in the Senate after SEC Chairman Mary Schapiro and numerous consumer and investor groups expressed concerns that it dismantles some of the protections put in place after the Enron scandal and the excesses of the dot-com era. Senate Democrats demanded that investor protections be added to the bill.

On Tuesday, the future of the bill seemed in doubt when Senate Republicans rejected Democratic attempts to add protections to the bill and link it to reauthorization of the Export-Import Bank, an agency that helps U.S. companies finance their sales abroad. The Democratic leadership decided to move ahead after deciding on two amendments that addressed some, but not all, of the investor protection concerns.

That wasn’t enough for some Democrats. The Senate’s no. 2 Democrat, Dick Durbin of Illinois, said the bill would “allow companies to use billboards and cold calls to lure unsophisticated investors with the promise of making a quick buck investing in new companies.” Absolute NONSENSE.

“We are about to embark upon the most sweeping deregulatory effort and assault on investor protection in decades,” Sen. Carl Levin, D-Mich., said.

The centerpiece of the bill is a measure to reduce costs for companies seeking to go public by phasing in over five years SEC regulations that apply to “emerging growth companies.” That status would be in effect for companies with annual gross revenue of less than $1 billion.

The measure would remove SEC regulations preventing small businesses from using advertisements to solicit investors, raise from 500 to 2,000 the number of shareholders a company or community bank can have before it must register with the SEC, and allow smaller companies to sell up to $50 million in shares, compared with $5 million now, without filing some SEC paperwork.

It also encourages the practice of “crowdfunding,” in which the Internet is used to raise capital from a large number of smaller investors. The measure as it passed the House limits individual contributions to $10,000 or 10 percent of the investor’s annual income.

Obama expressed his support for the original House legislation, but the White House also said it supported Senate Democratic efforts to add adequate safeguards for potential investors in light of any reduced government oversight of investment transactions.

The Senate passed, by 64-35, an amendment on crowdfunding that requires websites to register with the SEC, requires promoters who are paid by a company to reveal that fact and requires a company trying to raise money to provide information about its financial condition, business plan and shareholder risks. It limits investments to 5 percent of annual income for those earning under $100,000 a year, or 10 percent for those earning more than $100,000.

The less-regulated House version, said Sen. Jeff Merkley, D-Ore., one of the amendment sponsors with Sens. Michael Bennet, D-Col., and Scott Brown, R-Mass., is “simply a pathway to predatory scams.”

Crowdfunding is now banned because it is not legal to widely advertise and offer securities to the public without SEC registration.

A second amendment, promoted by Sen. Jack Reed, D-R.I., would have tightened the definition of “shareholder” so that large companies don’t undercount the number of their shareholders in order to stay within the shareholder limit, set to rise from 5,000 to 2,000, for SEC registration. It fell on a voice vote.

White House press secretary Jay Carney praised the addition of the crowdfunding protections and said, “We will be vigilant in monitoring this and other elements to ensure the overall bill achieves its goal of helping entrepreneurs while maintaining protections for investors.”

HUGE victory for many small, grass-roots groups without whose efforts, this bill probably would never have been written or come to the floor of either chamber. So, we owe everything to these guys on their relentless pursuit of doing the right thing. What follows is an abridged story of how it happened:

When the Senate moved to vote on the House version of the JOBS bill last Thursday, it included a highly anticipated crowdfunding provision, the origins of which, appropriately, came from “the crowd.”

While there were many groups, companies and individuals involved in shaping the legislation, one of the most focused and sustained efforts pushing for the legalization of large-scale, ownership-based crowdfunding has come from an eclectic collection of internet-connected grassroots influencers: A blogger who first posted his idea on BoingBoing in 2009; the actor Whoopi Goldberg; a group of small business lawyers in Oakland, California; a trio of determined entrepreneursa small business group in Washington, D.C.; and the White House Office of Science and Technology Policy.

This group of influencers have helped push through a big rule change that many entrepreneurs hope could unlock that first stage of seed financing that evaporated with the onset of the recession.

The result of the legislation is that entrepreneurs will be able to test the viability of their ideas in a way that’s currently not possible by raising limited amounts of equity capital from large numbers of people who don’t have to be “accredited” by the Securities and Exchange Commission. And they could spread the word about their business ideas and solicit investors from their social networks online, which under current law is illegal without registering the business with all 50 state regulators.

That current state of affairs struck many in the small business and entrepreneurial community as absurd, at a time when projects on platforms like IndieGoGo and Kickstarter were garnering huge amounts of donations.

“If you try to offer equity to more than 35 members of your friends and family on Facebook, then you could go to jail,” said Woodie Neiss, an entrepreneur based in Miami who’s been working with two of his friends and building a movement for the past year to change the law. “That’s what we’re trying to say: This is silly. Let’s come up with a framework to enable this to work.”

Along with his friends, Neiss has been working with a San Francisco editor, a Washington, D.C. lobbying group for small businesses, and a loose coalition of entrepreneurs, lawyers and academics and the internet to build a grassroots lobbying campaign to influence public opinion and to change decades-old securities law to allow for experimentation with the idea of crowdfunding investments in startups.

Paul Spinrad, executive editor of Make in San Francisco, has worked with Neiss to lead the movement. A software developer and former section editor at WIRED, Spinrad had experimented with a crowdfunding prototype platform in 2003 called Premises, Premises. His later and (current) work at MAKE magazine inspired other business ideas, but he hasn’t had the time or money to invest in them. That led to a series of conversations with friends, and a December 2009 blog post on BoingBoing that solicited ideas from readers about how securities laws could be changed to allow equity-based crowdfunded investments. Spinrad’s initial idea was to persuade the SEC to carve out a regulatory exemption for any capital raising efforts under $10,000, and limited investor involvement of $100 per person.

It turned out that there were a lot of people who were interested in Spinrad’s idea. One group was the The Sustainable Economies Law Center (SELC) in Oakland, a group dedicated to promoting local community-oriented economic growth . Spinrad convinced its co-director Jenny Kassan to help him after reading one of her business columns in a local newspaper. Kassan herself was interested in the concept because she had a background in securities law and consults for small businesses on financing strategies.

At first, Spinrad and the SELC collaborated to petition the SEC to relax its rules on small business fundraising practices. Spinrad, Kassan and their colleagues raised $1,321 from 53 friends and associates in April 2010 to pay a token fee for the legal legwork on the crowdfunding site IndieGoGo. Spinrad documented the campaign’s progress at his personal blog “Change Crowdfunding Law,” and maintained a mailing list of about 200 people who had expressed interest in their campaign.

Over on the East Coast, Neiss and his two friends Jason Best and Zak Cassady-Dorion founded their own initiative called Startup Exemption, through which they hammered out the principles of a crowdfunding framework based on data garnered from the existing range of crowdfunding sites. They suggested a total fundraising limit of one million dollars for each small business, which the Small Business Administration defines as companies with average annual gross revenue of less than $5 million during each of the last three years, or since a business’ incorporation. Investors who aren’t wealthy enough to meet the SEC’s “accredited investor” standard would be limited to investing $10,000 or 10 percent of their adjusted gross income. Under the framework, state securities registration requirements would be pre-empted and entrepreneurs would have to register on a platform with their social security information, their real online identities on social networks, undergo a background check, and expose their business plan and idea to the public, which would thoroughly vet and discuss the idea online, as well as the business’ progress.

The two met in January last year after attending a small business forum convened by the SEC. While Spinrad writes and thinks out aloud on his blog about the nuances and implications of changing the law and tracks the progress of the campaign, Neiss and his friends have been lobbying public opinion and legislators on the issues. The duo have also been in touch with the White House Office of Science and Technology policy, which reached out to them last June: A senior policy advisor working the administration’s StartUp America initiative and doing outreach to the business community had been following Spinrad’s blog and asked the duo to come up with a two-page brief on their crowdfunding exemption idea.

Meanwhile, Neiss had also been working Capitol Hill, his network of friends and generating publicity for the idea. Last January, Karen Kerrigan, president of the Small Business and Entrepreneurship Council, helped Neiss land meetings at the SEC and with Rep. Patrick McHenry, (R-N.C.,) a member of both the House Financial Services and the House Oversight and Government Reform Committees. Several hearings were held throughout the course of the year on a bill that McHenry introduced that would legalize crowdfund investing. The House eventually voted to approve it for the first time last November, with full White House support. (President Obama touted his Startup America initiative in his State of the Union speech this year and reiterated his previous support to legalize crowdfunding.) Shortly after that, Neiss used IndieGoGo to raise money to organize a rally on Capitol Hill to publicize the issue and to urge the Senate to move the legislation, where it faced stuff opposition from state securities regulators and consumer groups.

Then, on December 9th, Whoopi Goldberg weighed in on her Facebook page on the issue, and asked her followers to sign Startup Exemption’s online petition to members of the senate to move the legislation.

“I was at a friend’s dinner in NYC,” Neiss explained in an e-mail. “I was talking about how hard it is to get capital for startups. One of the guys turned out to be President of Whoop Inc. He asked if there was anything they could do to spread the word. I met with them and they started to help spread the word.”

In the Senate, up until Tuesday, two versions of a crowdfund investing bill have been competing for legislators’ support: S. 1791, Sen. Scott Brown, (R-Mass.)’s Democratizing Access to Capital Act, and Sen. Jeff Merkley, (D-Oregon)’s Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND). Both were introduced in December. Brown’s was supported by crowdfunding boosters, while Merkley’s was supported by state securities regulators.

The political climate is on the crowdfunding supporters’ side. Both the administration and Congress want to be seen doing something to boost the economy in an election year.

Tim Rowe, founder and CEO of the Cambridge Innovation Center, testified in front of the senate banking committee last week generally in support of the idea, with his own suggestions on how to improve on the current proposals. Wefunder.com, a crowd investing platform for startups, which is a startup itself at the innovation center, has launched an online petition in support of Brown’s legislation. More than 2,800 people have signed it since it was launched at the end of January.

Both Spinrad and Neiss are excited.

“We don’t understand why everyone isn’t talking about this,” said Spinrad in an interview. “This is an amazing, fundamental change, and it’s something everyone can relate to. Everyone knows Kickstarter, and everyone knows of a local restaurant that needs to get funded.” :)

He hasn’t sat back on his laurels even though the legislative momentum appears to have been on his camp’s side. So what did he do? Launch another crowdfunded effort to fund another campaign, of course.

In mid-February, he and the American Sustainable Business Council launched a new campaign on a new crowdfunded media-buying platform called Loudsauce to raise $13,530 for a full-page POLITICO ad about crowdfunding legislation.

It’s happening, kids!


A Gag Order on Pennsylvania’s Doctors.

A new provision could forbid the state’s doctors from sharing information with patients exposed to toxic fracking solutions.

I wrote about the terrible fate of Crystal Stroud in an earlier blog post. https://isellerfinance.wordpress.com/2012/02/01/crystal-stroud-needs-erin-brockovitch-black-gold-for-the-gop/ 

It is getting worse.

Under a new law, doctors in Pennsylvania can access information about chemicals used in natural gas extraction—but they won’t be able to share it with their patients. A provision buried in a law passed last month is drawing scrutiny from the public health and environmental community, who argue that it will “gag” doctors who want to raise concerns related to oil and gas extraction with the people they treat and the general public.

Pennsylvania is at the forefront in the debate over “fracking,” the process by which a high-pressure mixture of chemicals, sand, and water are blasted into rock to tap into the gas. Recent discoveries of great reserves in the Marcellus Shale region of the state prompted a rush to development, as have advancements in fracking technologies. But with those changes have come a number of concerns from citizens about potential environmental and health impacts from natural gas drilling.

 

There is good reason to be curious about exactly what’s in those fluids. A 2010 congressional investigation revealed that Halliburton and other fracking companies had used 32 million gallons of diesel products, which include toxic chemicals like benzene, toluene, ethylbenzene, and xylene, in the fluids they inject into the ground. Low levels of exposure to those chemicals can trigger acute effects like headaches, dizziness, and drowsiness, while higher levels of exposure can cause cancer.

Pennsylvania law states that companies must disclose the identity and amount of any chemicals used in fracking fluids to any health professional that requests that information in order to diagnosis or treat a patient that may have been exposed to a hazardous chemical. But the provision in the new bill requires those health professionals to sign a confidentiality agreement stating that they will not disclose that information to anyone else—not even the person they’re trying to treat.

“The whole goal of medical community is to protect public health,” said David Masur, director of PennEnvironment. He worries that the threat of a lawsuit from a big industry player like Halliburton or ExxonMobil for violating a confidentiality agreement could scare doctors away from research on potential impacts in the state. “If anything, we need more concrete information. This just stifles another way the public could have access to information from experts.”

The provision was not in the initial versions of the law debated in the state Senate or House in February; it was added in during conference between the two chambers, said State Senator Daylin Leach (D), which meant that many lawmakers did not even notice that this “broad, very troubling provision” had been added. “The importance of keeping it as proprietary secret seems minimal when compared to letting the public know what chemicals they and their children are being exposed to,” Leach said recently, which is consistent with his position on the subject going back to last year:

Leach Reacts to Study Claiming Shale Gases More Harmful than Coal and Oil

HARRISBURG, April 12, 2011 – State Sen. Daylin Leach (D-Delaware/Montgomery) today released a statement responding to a new study that found the greenhouse gas emissions produced by Marcellus Shale drilling could be higher and more dangerous than previously thought.

The study, commissioned by Cornell University, predicted that by 2035, Marcellus Shale gas will make up more than 45 percent of gas production, surpassing gases developed from coal and oil. The researchers then found that shale gas could actually be more harmful and cause more emissions than coal and oil despite earlier reports that suggested shale gas is cleaner than coal and oil.

“Although we can’t go back in time and prevent some of the environmental damage done by the coal industry, we as a society need to learn and grow from past mistakes in order to prevent making them again,” Leach said. “The release of this most recent study contradicting previous claims suggests that we must be absolutely sure of the environmental impact of drilling before we begin. Because Shale gas could be more destructive and could produce a bigger and more harmful carbon footprint, we need to further study its impact and enact vigorous regulations to make sure that the industry is allowed to grow and prosper while protecting our environment and the lives of future generations of Pennsylvanians.”

In their briefing to the public about the results of the study, the Cornell researchers explained that the wells used to drill shale gas are larger than conventional wells, drill for longer periods of time, have a higher probability of problems occurring during the drilling process, release more gases during the drilling process and release more flowback waste. They added that because the wells are bigger and use more horsepower than conventional wells and because the methane emissions will be so high, the wells will produce a greater amount of greenhouse gas emissions, and more harmful emissions at that.

Leach has proposed a bill that would enact a moratorium on Marcellus Shale drilling on state forest lands and a bill that would enact regulations on the drilling process in Pennsylvania in order to preserve and protect the environment. The bills await consideration in the Environmental Resources and Energy committee.

More information about the Cornell study and its results can be found at http://www.eeb.cornell.edu/howarth/.

The limits on what doctors can say about those chemicals makes it impossible to either assuage or affirm the public’s concerns about health impacts. “People are claiming that animals are dying and people are getting sick in clusters around [drilling wells], but we can’t really study it because we can’t see what’s actually in the product,” said Leach.

At the federal level, natural gas developers have long been allowed to keep the mixture of chemicals they use in fracking fluid a secret from the general public, protecting it as “proprietary information.” Proprietary information? Come-on, Man, they all use the same stuff. What possible competitive advantage could one developer have over another, when they all operate solely in the land parcels they lease. Proprietary information. Unfortunately, we seem to be the fools they think we are.

The industry is exempt from the Environmental Protection Agency’s Toxics Release Inventory—the program that ensures that communities are given information about what companies are releasing. In 2005 the industry successfully lobbied for an exemption from EPA regulation under the Safe Drinking Water Act as well, in what is often referred to as the “Halliburton Loophole.” The Obama EPA has pressed drillers to voluntarily provide more information about fracking fluids, but the industry has largely rebuffed those appeals.

The latest move in Pennsylvania has raised suspicions among the industry’s critics once again. As Walter Tsou, president of the Philadelphia chapter of Physicians for Social Responsibility, put it, “What is the big secret here that they’re unwilling to tell people, unless they know that if people found out what’s really in these chemicals, they would be outraged?” Indeed sir, indeed.


P2P Lending. Not American Greed.

This piece was concocted by CNBC as a promo for the TV reality Show titled: American Greed.

In it, you will notice how the article bounces off the leading and legitimate P2P lenders, Lending Club and Prosper, to the illegal scam artist James Lull, who  ran an investment scam in Hawaii that bilked 50 investors out of millions of dollars (Lull me to sleep), thus making it appear that these entities shared common ground with, and were somehow legitimizing scam artists like James Lull. Nothing could be further from the truth and I am both shocked by and ashamed of the standards of CNBC journalism.

This is a classic case of editorial and advertising guys clearly feeding from the same trough, and journalistic integrity be damned. This makes me, a jerk-off blogger, feel like Rachel Maddow might invite me to dinner. So, read on:

The art of matchmaking is not just to find the perfect mate. It is also used to connect investors to borrowers.

It is called peer-to-peer lending and occurs directly between individuals. Much like matchmaking for love, the use of this process has exploded online.

“They use this platform through the Internet to bring together and make the match between the borrower and the lender,” said Lori Schock, director of the Securities and Exchange Commission’s Office of Investor Education and Advocacy. Written as though it were a super-market tabloid expose. As in, “They use the Internet to hook up black market sex traders with innocent young Russian girls who are looking to come to America through these marriage sites.”

For the investors, it provides the opportunity to make a higher return than rates offered by other investments. For the borrowers, it allows them to receive funding if they do not qualify for conventional loans. Hundreds of millions of dollars in loans have been funded through online websites. As in, “Hundreds of millions of dollars are being laundered through these online black market web sites.”

One of the reasons peer-to-peer lending has grown in popularity is because of tighter lending restrictions imposed by banks.

For example, this process can help a borrower pay down debt. It is successful for borrowers if they have accumulated credit card debt and are stuck paying it back at a high interest rate. With peer-to-peer lending, borrowers may be able to receive a loan to pay off the debt and then pay back the loan to the private investor at a lower interest rate than offered by the credit card.

Two of the largest peer-to-peer lending sites are now regulated by the SEC and are required to disclose information about the investment products. As if they were finally wrangled into the tent of regulatory protection on behalf of the poor defenseless consumer and forced, forced I say, to disclose and become (shocked face) transparent!

Joseph Toms, chief investment officer of Prosper, one of the major companies that brings borrowers and lenders together, says this type of lending is a friendly alternative.

“Really the difference in peer-to-peer lending is it does not have a bank involved. It has a wide democratic group of investors who decide independently whether they want to fund you or not,” Toms said.

Potential borrowers post information about how much money they need, as well as why the money is needed.

“You have to give some information about you, such as an address and social security number and allow us to pull a credit report on you to assess what kind of credit risk you are,” Toms said.

These online platforms also work to obtain a borrower’s FICO score, which uses factors such a person’s previous payment history, current level of debt and length of credit history to determine the credit risk.

“The platforms do their due diligence in trying to get the FICO score of the borrower. They also get their asset information,” said Schock.  (And, here it comes) “But, there is also the risk that someone may not be truthful in disclosing their ability to repay the loan.” 

It is critical to do research before investing. The reality of the situation is that if the borrower is unable to repay the loan, it is difficult for the private lender to get back the money. Really? Where’s the evidence? Oh, that’s right. You were just using the legitimate P2P platforms as a ramp to your story of a bogus scam artist on the Islands. Oh, yeah.

Sub-prime mortgages, I guess we the tax-payers were the private lenders who found it “difficult” to get back our money on that one.

“I would be remiss to suggest anyone invest with one that is not registered with the SEC,” Schock said. Really? You mean like Bernie Maddoff? Right. He was registered with the SEC. How’d that work out for you Maddoff investors?

But, here comes my favorite segue. It almost broke my neck: 

If the website or individual is not regulated, it could open the door to scams like the one former mortgage broker James Lull was accused of orchestrating. While facing sentencing in 2009 for wire fraud in Hawaii, Lull died after his SUV plunged off a cliff.

Prosecutors say Lull, based in Hawaii, offered investors the opportunity to help distressed homeowners by funding high interest bridge loans. He claimed it would help people pay off debt to boost their credit scores, so they could qualify for an affordable mortgage and provide investors with a high rate of return. However, Lull’s loans became too popular among his investors.

“James Lull actually at some point had more investors than he had actual bridge loans to put their money within,” FBI Special Agent Tom Simon said.

Investigators believe without loans to fund, Lull pocketed the money and bilked tens of millions of dollars out of about 50 investors.

It is just like saying that because the Peer-to-peer lending sites have become popular while encouraging investors to put their money with them, that they are just like James Lull’s scam. Amazing feat of journalistic jujitsu.

Now, back to the legitimate P2P lending markets:

To reduce the risk for investors, regulated sites determine the credit risk of borrowers and reject those who do not meet established criteria, such as a minimum required FICO score. Once the credit risk of the borrower has been determined, the loan request is listed in the online marketplace for investors to view.

“The marketplace looks at your loan and all these different investors bid on the loan at as little as $25 a piece or the full value of the loan,” Toms said. “So over about a 14 day period, you will either be funded and get 100 percent of your money or 70 percent of your money.”

Both Schock and Toms suggest that investors reduce their risk by funding small portions of multiple loans, instead of simply funding a single loan.

“The main thing is you need to make sure you have diversification. Don’t invest all of your money in one note,” Schock said. “Maybe spread it out amongst several notes, so that in case of a default, you do not lose all of your money.”

“This is a numbers game, which means that if you only lend to two or three people you are taking significant risk,” Toms said. “But, the data shows if you actually lend to hundreds or thousands of people, your risk of losing money goes down dramatically.”

However, Schock still says there are some warning signs to watch out for when considering this type of unsecured lending.

“I think one of the red flags is that you do not know with whom you are doing business,” she said. “The second red flag is that in case something happens with the borrower and they are not able to repay the loan, your recourse is extremely limited and you might lose all of the money that you have invested in this.”

It is important for both the borrower and investor to do their research and verify the trading platform itself.

One can verify individuals or organizations that facilitate peer-to-peer lending through the free EDGAR database at www.sec.gov or by checking with that state’s securities or banking regulator to see if the platform is registered with them.

“Remember, even though you might know the background or why they say they want to borrow the money, you still do not know the individual,” Schock said. “It is nice if someone says I need this money to buy an engagement ring, and you want to help that person, but you just need to make sure that you are doing your due diligence.”

Without doing research or dealing with a trusted borrower, investors could find themselves in a similar situation to that of lender Claire Mortimer, who invested with Lull. Mortimer thought she was providing money for loans that would help borrowers pay down debt, while she collected a 12 percent return on her money. Instead, Mortimer lost hundreds of thousands of dollars.

“It could happen to anybody,” she told CNBC. “It happened to me. I’m an educated person. I think of myself as being pretty savvy, but I got ripped off big time.”

So, CNBC, my fledgling industry has to thank you for conflating the wholly legitimate and regulated peer-to-peer lending space with a scam artist who ripped off 50 investors, which have nothing to do with each other, while shamelessly promoting your wonderful new show, American Greed. Sounds like you might want to adopt the name of the show for your brand of journalism. Just saying.


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